Social Security (National Insurance Credits) Amendment Regulations 2007

16:16:00

Lord Skelmersdale
rose to move, That an humble Address be presented to Her Majesty praying that the regulations laid before the House on 7 September be annulled (SI 2007/2582).

The noble Lord said: My Lords, I had little thought when I put down this Prayer that we would be debating a second failure by Her Majesty’s Revenue and Customs within a week. Rather than the loss of a disc of the financial records of 25 million people, this social security statutory instrument reveals a joint failure by HMRC and the Department for Work and Pensions, a department whose care and attention to detail has been slipping woefully under this Government. As recently as 25 October, I complained about this when we discussed the Housing Benefit (Loss of Benefit) (Pilot Scheme) (Supplementary) Regulations 2007, saying that the department’s predecessor department, that of social security, was considerably more efficient.

These regulations, which came into effect on 1 October, have been made to correct the overpayment of benefits—jobseeker’s allowance, incapacity benefit, bereavement benefit and the state pension. As the Explanatory Memorandum states:

“The changes ensure that earnings ... which were erroneously awarded ... will still count towards the satisfaction of the contribution conditions”,
 

for those benefits. They also mean that decisions will not be revised, and ensure that certain classes of contributions will be treated as being paid on time, whether they actually were or not. In other words, they provide an amnesty for benefit claimants who have been overpaid due to, we are told, a mismatch of data between two computer programs—the DWP’s pensions strategy computer system and the NIRS2 computer run by Her Majesty’s Revenue and Customs. There are, we are told, 90,000 such cases of overpayment. Lucky recipients; they are clearly doing rather well out of this exercise.

Not only that, on the other side of the equation it is estimated that 30,000 claimants have been underpaid. The Explanatory Memorandum states:

“The decision has been made to make good the underpayments”.
 

How gracious can you be? Were such sentiments to appear on a public paper over which I, as a Minister, had control, they would certainly not appear like that. The noble Lord must be heartily relieved that few, if any, benefit recipients will read the Explanatory Memorandum. Unsurprisingly, I would be much ruder if such a decision had not been made, and we certainly would not be debating this matter late on a Thursday.

This mismatch of computer systems has been going on since 1998. While we are told that the period in question finished in 2006, the regulations are of a much wider scope, with a start date of the financial year 1993-94, ending in 2007-08. Why this very long period? How, too, can we be assured that this is the end of the matter?

I observe from the 31st report of your Lordships’ estimable Merits of Statutory Instruments Committee that:

“The flaw in Her Majesty's Customs and Revenue NIRS 2 computer has been identified and is believed”—
 

I underline that word—

“to have been operating correctly since November 2005”.

“Believed” is a very odd word in the circumstances. If it has been working correctly since then, there should be no new cases of overpayments since then or, indeed, of underpayments. Why then does this statutory instrument extend the amnesty for another 16 months until April 2008? That belief cannot be very strong. If it is ill founded, will we not find another order next year to do exactly the same job? Was that computer program, NIRS2, created by the same firm—EDS, I believe—that programmed the one dealing with the Treasury’s tax and pension credits? Are they perhaps even the same computer?

I have never heard that there has been an amnesty for overpayments in the tax credits areas since the Government introduced it. We have heard screams of rage from people who have been overpaid and have had to pay the money back. It is hardly surprising when people on low incomes suffer very badly from an irregular income stream. It seems that there is a division of opinion between the DWP and the Treasury about what should happen in these cases. Did the DWP need Treasury approval before laying the regulations, or did it do so off its own bat? My party has decried this creeping control of social security by the Treasury on a number of occasions. Is it not high time that the Government sorted themselves out and the Treasury did what it is good at—collecting money—and the DWP paid out pensions and benefits, which is what it is good at? Then we would not have the nonsense of tax and pensions credits being overpaid and having to be clawed back.

Although I do not like it, I have to accept that we are where we are and that this statutory instrument seeks to sort out yet another mess of the Government’s making. Why is it that every time the Government go out to tender on a computer program, it hardly ever delivers what is required and yet more taxpayers’ money needs to be thrown at consultants to sort it out? In the summer of 2005, we learnt that the Office of Government Commerce—ironically to be found in the Treasury—revealed that of 254 computer projects, one-third had skipped the first two stages of evaluation, which include an assessment of whether the new computer system is,

“feasible, affordable and likely to achieve value for money”.

Furthermore, while 57 projects were awarded a green-light rating, 127 had amber warnings and 70 had red warnings, meaning respectively that the project could continue only provided certain alterations were made and that immediate remedial action was needed. Eight projects were given double red warnings that prompted letters to the relevant Permanent Secretaries stating that the project had very serious problems.

I have a pet theory to put to the Minister. It is that the team in the department—any department—that arranged the original contract is not the one that receives the finished product, because big computer programs take longer to develop than civil servants remain in any particular job. Each new team will have its own ideas about what should go into the program, hence more delay and cost. My theory is backed up by a question I put to the noble and learned Lord, Lord Falconer of Thoroton, when, as Lord Chancellor, he was answering a Starred Question about a project being commissioned at the time for which his department was responsible. I asked him for a guarantee that there would be no changes to a contract under discussion before delivery of the finished product. He failed to give me that assurance. He said:

“We will do our level best to ensure that all the requirements are provided at the earliest possible stage. I cannot guarantee that we will get it absolutely right but, plainly, the noble Lord's point is a good one”.—[Official Report, 15/3/04; col. 7.]
 

How long did it take for NIRS2 to be developed? When was it delivered? How many civil servants who commissioned it were in post to run through it when it was finally delivered? The only way to mitigate the problem of computer failures is, as a Select Committee of another place so wisely suggested, to nominate a civil servant to oversee a computer project from the original specification to final delivery. Have Ministers in the Department for Work and Pensions had discussions on this with their Permanent Secretary? Indeed, does the Minister know of any department that has held such discussion? I hope that he will be able to answer the first question today; I should be more than happy to have an answer to the second question in writing.

Your Lordships’ Merits Committee zeroed in on the waste of taxpayers’ money, which of course also concerns me. Up to £300 million, covering possibly 90,000 awards of benefit, is to be written off. I say “up to” as it appears that no one knows how many claims have been overpaid or to what value, and in the circumstances it appears that it is not worth the trouble and expense of finding out. Are discussions going on regarding the possible suing of the computer company, as they are about the program dealing with tax and pensions credits?

Whichever, this £300 million is the beginning of the cost to the taxpayer. There is another £65 million or so of underpayments to be made good from the department’s administrative budget. This amount of money sloshing around in the administrative budget does not smack to me of tight fiscal control. Add those two unexpected sums together and you get £365 million, more or less. You would expect that that would solve the major part of the problem—unfortunately, not a bit of it. There is still the little matter of correcting the computer fault. Additional computer costs are believed to be £0.7 million, shared between the DWP and HMRC, with suggested HMRC staff costs of £1.3 million. Knowing that computer specialists command more in an hour than your Lordships’ expenses allowances command in a day, I am not surprised by the first figure, but what on earth are the enormous HMRC costs for?

This has been yet another very sorry story, to which I would like the explanations for which I have asked. In essence, I am concerned at the Government’s very loose control over the public purse and their abject failure in anything to do with computers. I beg to move.

Moved, That an humble Address be presented to Her Majesty praying that the regulations laid before the House on 7 September be annulled (SI 2007/2582). 31st Report from the Merits Committee, Session 2006-07.—(Lord Skelmersdale.)

Lord Kirkwood of Kirkhope
My Lords, the House should be grateful to the noble Lord, Lord Skelmersdale, for moving this Motion. It involves a series of very important points. The noble Lord made a very effective speech and I concur with much, if not all, of what he said. I shall ask some questions. If the Minister cannot answer them this afternoon, perhaps we could share correspondence which might shed light on some of these matters to the benefit of everyone involved.

On 15 November, Mr James Plaskitt announced in the House of Commons that there were 4,000 duplicate payments in the Pensions Service and the Disability and Carers Service as well as ex gratia payments. Is that part of the same problem, or is it something else altogether that is embedded in the Disability and Carers Service? Is it part of the pattern? The noble Lord, Lord Skelmersdale, made the important point that the national insurance recording system is the basis on which contributory benefits are calculated. If they are wrong, everything downstream of that is, almost by definition, likely to become wrong. So the integrity of the whole contributory system requires that the 70 million records currently held on NIRS2, as it is known by acronym, are an essential part of the integrity of payments of benefits of a contributory kind.

There are 152 or more incoming streams of data into NIRS2. That is not an easy project. It enjoyed a very troubled birth. I think that Andersen Consulting went bankrupt as a result of putting the thing into place, EDS tried to take it over, and it is now in the hands of the Aspire Group of contractors. Perhaps the Minister can confirm that that is indeed the case. It is a process that is very difficult to amend because it is live all the time. You cannot switch it off overnight to clean up data. An important question to which the House needs an answer is: what mismatch went wrong? A mismatch of data is a description of a symptom of a mistake in the process. What we want to know is: what was the mistake in the process? Are the data corrupt on both platforms? Are the data identified as being corrupt on one or other of the two systems? They are entirely different bases of software. They were not designed to run together, so they could both have problems unique to themselves, or it could be a problem of the integration of the two. It is important to understand precisely what went wrong so that we can understand whether the process has been rectified.

Further, although the scanning was obviously necessary to pick up the problem, will the fix be a software fix or will some of it need to be done manually? Some recipients of overpayment or underpayment will have to be contacted individually, so there is obviously going to be an element of manual handling, but will the debugging of the interface between the two different bits of software be done electronically, or will members of staff in the DWP have to turn their hands to some of the record cleaning by themselves as a desktop exercise?

One thing that has a direct bearing on that is the very, very tight departmental expenditure limit for the next three years just announced in the Comprehensive Spending Review. That will put great pressure on the head count, because the head count is separate and distinct and will have to fall, never mind the fact that the money in the DEL is being reduced over the next three years. To what extent has the overpayment been provoked by the fact that the department may not even have the staff to do that in any other way? Of course the overpayments are welcome, because it is no fault of the claimants of those benefits that the mistake has been made. To what extent has the tight envelope that the Department for Work and Pensions been facing been a contributory factor in working out how to fix the problem?

What has the National Audit Office and the Comptroller and Auditor-General to say about all that? This is one of the principal reasons that the department’s accounts have been qualified endlessly for the past seven, eight or more years. Until we get the reconciliation of data streams organised in a way with which the Comptroller and Auditor-General is satisfied, the department's accounts will continue to be qualified. To any kind of business outside the public service, that would be an almost fatal blow to its credibility in the marketplace. That is a serious issue and a key element in why the accounts continue to be qualified.

What exactly were the communications between the Social Security Advisory Committee and the department? We are told in the Explanatory Memorandum that, at the end of the day, the SSAC was satisfied with the instrument and let it proceed, but because the Inland Revenue—the HMRC—is involved, we cannot see, as we could if it were an entirely DWP issue, exactly what the SSAC had to say. It would publish memoranda, reports and everything that involved it directly if the instrument were referenced by the department to the Social Security Advisory Committee. I am prepared to believe that, at the end of the day, it was content to let the instrument proceed, but were there communications between the committee and the department that we cannot see because of the involvement of HMRC, the Inland Revenue, that would cast some light on any concerns that the committee originally had? This is a very technical business, and I for one would have been a lot more content if any communications between the department and the SSAC, and indeed between the department and the Comptroller and Auditor-General, about these matters, had been published. I would certainly have been an awful lot more confident that the thing was being done in the best way possible.

Finally, I am very uneasy. I know that we have to do this and I understand the need to protect the claimants, but the regulations are creating a unique class of 130,000 claimants at law. Apart from anything else, that does not help to deal with the complexity; it simply creates extra layers of things that people have to pay attention to when implementing the rules as they stand. It is a worrying precedent to find that there has been an error in the department. It is good that the department has owned up to it. This has been going on for a long while. One might have thought it possible to fix it earlier, but we are where we are, as the noble Lord, Lord Skelmersdale, says, and we must accept that no one is suffering financially as a result. However, creating a completely separate class of people at law is a worrying precedent. Indeed, is it a precedent? I believe that the regulations are time-limited, but having been through this procedure, can we take it as read that, if there are mismatches between NIRS2 and the pension service computer system in future and it goes wrong again, there is something to which we can resort in the future? This is the first time to my knowledge that the regulations have been changed to protect the claimants in the way in which the Government have sought to protect them.

The noble Lord, Lord Skelmersdale, is absolutely right that there is much at stake in the regulations. This is not only about the lack of competence and the complexity but about the difficulty in trying to use the meagre resources available to the department to handle some of these very sophisticated IT systems in a way that guarantees that no one suffers at the end of the day. Although these people have been picked up, others in the system might not and might be suffering as a direct result of the complexity of the IT systems.

Lord McKenzie of Luton
My Lords, I thank the noble Lords, Lord Skelmersdale and Lord Kirkwood, for their contributions today. I understand that the mechanism of the prayer is to be able to debate the issue rather than to seek seriously to disrupt the regulations. I hope that that is the case. I shall start by putting matters into context. Without being complacent about the issue that has arisen, there are 65 million active national insurance accounts, 11.7 million customers who receive the state pension, and 2.7 million individuals who receive incapacity benefits and credits. That is the scale of the DWP’s customer base.

I have listened to all the points made on the Motion to annul the regulations, which among other things legitimise certain payments of the state pension, incapacity benefits, jobseeker’s allowance, bereavement benefits and widow’s benefits. These benefits are invariably paid to vulnerable people or to people with a limited income. The 31st report from the Merits of Statutory Instruments Committee has drawn the regulations to the attention of the House on the grounds that they give rise to issues of public policy likely to be of interest to the House, and that it may wish to probe the cost of the flawed computer system to the public purse and how the error came about; exactly the issues that have been raised this afternoon.

The reason for the incorrect calculation of these benefits is the mismatch of data about the period of incapacity and the award of national insurance credits. The DWP is responsible for administering claims for incapacity benefit for which national insurance credits are awarded for the period in which the person cannot work. The DWP computer records the period of incapacity, and the HMRC computer records the awards of the credits. It became clear that discrepancies existed between the data held on these two computer systems, and this was picked up by the National Audit Office in its report on the National Insurance Fund for 2004-05.

The error arose, a point pressed by the noble Lord, Lord Kirkwood, as a result of the conversion of data held on the first national insurance recording system, NIRS1, to the second system, NIRS2, in 1998. The IT fault was exaggerated by a breakdown in the supporting business processes intended to resolve discrepancies between data held on the DWP computer and the NIRS2 system. I apologise for the error and its ensuing consequences. The DWP has worked with HMRC to resolve both the IT and business processes, and I can assure the House that the IT problem has been resolved since November 2005. New instructions have been issued to DWP staff setting out the actions that must be taken to rectify customers’ records when mismatches occur. The House will be aware that a Written Ministerial Statement was made by my honourable friend James Plaskitt on 23 July explaining the background and setting out how the Government intended to correct the affected cases, both of overpayment and underpayment. It was clear that the underpaid cases would have to be corrected, but we have to consider carefully how we deal with the overpaid cases, a point again pressed by the noble Lord, Lord Kirkwood.

The sole reason for the overpayment was the mismatch of the data recorded on two government computers. This can and should be classified as official error and therefore in this instance it would have been inappropriate to seek to recover any of these overpayments. I should say to the noble Lord, Lord Skelmersdale, that this is a completely different situation from tax credits where, as we have debated before, what are labelled as overpayments come about as a consequence of how the calculation proceeds under the rules.

Lord Skelmersdale
My Lords, it may be a completely different situation, but the result in essence is exactly the same.

Lord McKenzie of Luton
My Lords, I do not accept that. Perhaps we may go into the detail of the point on another occasion because my time this afternoon is limited.

We estimate that up to 30,000 people may have been underpaid contributory benefits, and the annual amount of underpayment is estimated to be around £65 million a year. However, in some cases no arrears will be due, or partial arrears will be due, because income-related benefits such as income support or pension credit have been paid in place of entitlement to a contributory benefit. The Government have given priority to correcting underpayments to ensure that people receive their correct entitlement, and compensation where there has been significant delay in making payment. Work to identify actual underpayments and to pay arrears is now under way and we expect to complete this work by early 2008. I should also advise the House that work to correct underpayments does not depend on the regulations before the House today.

I turn now to the issue of overpaid awards of benefit. We estimated that up to 90,000 people may have received overpayments. Of these, around 75,000 are pensioners. There was a choice. We calculate each case and where appropriate offer the option to pay national insurance contributions to restore the original amount of benefit or to allow the existing payments to continue. The first option would have meant disrupting not only entitlement to contributory benefits like state pension, but also entitlement to pension credit, income support, housing benefit and council tax benefit where these are in payment. People may have been unable to find the money to pay the national insurance contributions, and pensioners in particular may not have been able to find the money, in effect reducing the state pension and requiring reassessment of the other benefits, with the net outcome that the pensioner is likely to be no worse or better off.

These regulations provide the second option. They avoid creating anxiety and disrupting income flows for those people affected by the over-award of incapacity credits which would otherwise have followed if we took the first option. They also avoid unnecessary administrative work not only for DWP and HMRC, but also for local authorities. This approach recognises that such awards have been made and received in good faith, and it also recognises that some people may be placed in a difficult position if the awards were now to be revised. For example, people of pension age may be reliant on the level of income awarded to them, and financially it may not be as easy for them to make further contributions in retirement. They may also have taken this level of income into account in assessing how much money their spouse or civil partner will receive in the event of their death.

Similarly, people receiving bereavement benefit or extra state pension because of bereavement may be placed in a difficult position if the contribution record of the deceased spouse or civil partner is corrected and their benefit is reduced or withdrawn. As making further contributions to the deceased contributor’s account is not possible, some form of special action would be required to address this.

After careful consideration, the regulations were introduced to protect existing awards of state pension, incapacity benefit, jobseeker’s allowance, bereavement benefits and widows’ benefits which are based on incorrect records of certain credits. In the event of the death of a pensioner with a protected award, the regulations ensure that a surviving spouse or civil partner retains inherited entitlement to benefits.

Our estimate of the cases affected—30,000 underpaid and 90,000 overpaid—is no more than that. The estimates were based on limited information from a pilot exercise run by HMRC and, on the basis of that limited exercise, the annual cost of making good the underpayments is around £65 million and the amount overpaid around £90 million, which will decrease over time. We cannot be precise about the costs because of the interaction with income-related benefits, as I have explained. The administrative cost of £8 million that would be incurred without the regulations is also a broad estimate. It could be higher or lower depending on how complex it would be to correct the overpaid cases and invite and assess claims for pension credit and income support.

Lord Kirkwood of Kirkhope
My Lords, for the avoidance of doubt, will the Minister make it clear that the money to be found to make this good will not come from the National Insurance Fund but will be found within the department’s CSR over the next three years?

Lord McKenzie of Luton
My Lords, the administrative costs will have to come from the routine DWP DEL budget.

For example, a pensioner who received a state pension and pension credit might be no worse off if we were to calculate and reduce his state pension because that would lead to an increase in his pension credit. In other cases, the reduction in state pension would give rise to pension credit. Similarly, people below pension age who have been overpaid could have their benefit increased by claiming income support. Generally, when assessing the effect of the cost, we would expect that income support was in payment in up to 45 per cent of incapacity benefit cases and pension credit was in payment in about 65 per cent of state pension cases. The interaction with other benefits would therefore have a huge impact on the actual cost of correcting these cases. We will only know the true cost of correcting the underpaid cases once we have completed the exercise.

As I have said, the regulations deem the over-award of benefits to be legally correct, thereby avoiding the need to re-examine these cases. Although we are honouring existing awards of benefit, we recognise that the Government have a duty to ensure that errors in credits data are not perpetuated. For this reason, HMRC will correct national insurance records for those under state pension age so that future claims to contributory benefits can be correctly assessed. Where correcting the individual contribution record results in particular years being no longer qualifying years for state pension and other contributory benefits, HMRC will write to the individuals concerned advising them of their options and asking if they wish to pay any missing contributions. They will have six years to take up that offer, and payment of contributions will be at the rates that applied during the tax year concerned.

The Government do not believe that it would be right to seek a saving in relation to future costs given the background to the issue. Just as the Government have a responsibility to people who have been underpaid, they have a responsibility to those who have been awarded too many credits and who, as a consequence, have been overpaid benefit but were denied the opportunity to make up shortfalls in their national insurance records at the relevant time. That has been the result of system and related procedural errors and is not the fault of the contributors.

People depend on the Government to advise them about their national insurance record so that they can make properly informed choices about how they may protect or increase their entitlement to benefits. Decisions about whether to apply for credits or pay voluntary contributions are influenced by the information provided by the relevant government departments, and it is likely that much of the amount referred to as a potential overpayment would have been properly payable now, had the system and procedures worked properly, as a contribution to contributory and income-related benefits.

Specific questions were asked, and I will try to deal with as many of them as I can. The noble Lord, Lord Skelmersdale, asked whether the Treasury had approved the orders. Of course; we sought and received the Treasury’s agreement to allow the orders to be made. The noble Lord, Lord Kirkwood, asked about recent announcements about 4,000 cases of double payment. That relates to a small number of cases—4,000, as he identified—out of 1.6 million cases where DLA or AA is combined with state pension and pension credit. In this instance, there appears to have been a breakdown in communication between the Disability and Carers Service and the Pension Service over the benefits paid to a small group of customers. Steps have been taken to prevent such duplicate payments occurring in the future. That is a separate issue.

Both noble Lords asked who the NIRS2 supplier was. Andersen Consulting, later Accenture, implemented the upgrade of NIRS1 to NIRS2. The current system is operated under the ASPIRE contract since January 2005. The noble Lord, Lord Skelmersdale, referred to the phrase,

“believed to have been operating correctly since … 2005”,

and asked why there should be any extension beyond that. Testing has confirmed that the interface between the two computer systems has worked correctly since November 2005, but we have decided to look at all cases from 1993-94, the start of the strategy computer system, and go up to 2006-07 because it is just possible that some cases actioned after November 2005 could have had handling errors, although staff training has been improved.

Reference has been made to HMRC staff costs of £1.3 million. Those costs reflect the fact that those affected will contact HMRC about their national insurance record and the question of collecting and allocating class 3 contributions. I have dealt with the issue of the 4,000 duplicate payments. The noble Lord, Lord Kirkwood, asked about the SSAC. The issue was explained to the committee, which saw the draft regulations. The committee did not write to DWP Ministers.

That is the bulk of the issues that were raised. I will review the record and write further to noble Lords if necessary. The concerns raised by the Merits Committee and by noble Lords during the debate are recognised. We have resolved the issue that led to the errors and have acted in a balanced and proportionate way to put right the affected cases. We are firmly of the view that we have done the right thing by introducing the regulations, thereby avoiding unnecessary anxiety and distress for some 75,000 pensioners in particular. I hope that noble Lords will agree that in all the circumstances the only credible option now is to introduce the regulations.

Lord Skelmersdale
My Lords, that was an interesting speech from the Minister. He seems to have gained the impression in the preparation thereof that what the noble Lord, Lord Kirkwood, and I were complaining about was the existence of the order. Of course we are not; we are interested in the background, the follow-up and the previous activities of the two computer systems and the two departments.

Although the Minister explained carefully why the amnesty was going on for another two and a half years or so at the end of the period, he did not answer my question about why that period started so early. Am I to assume that it was in the year 1993-94 that the transfer was made from NIRS1 to NIRS2? If not, there seems to be no good reason for the period to start as early as it does.

Lord McKenzie of Luton
My Lords, the transfer from NIRS1 to NIRS2 took place in 1998, and that was certainly a key factor in the errors that arose. For the avoidance of doubt, I can say that checking is going on right back to that earlier period. In his presentation the noble Lord asked when NIRS2 was developed. I do not have a precise starting date, but it was clearly developed some time before 1998 because that is when it was actioned.

Earlier I did not answer the point about the OGC reviews and the red flags that were given to certain projects. The whole purpose of such reviews is for someone external to come in and look at the teams that are producing change, to check that their systems are up to scratch and that they are doing the testing and putting in all the arrangements that they should in order to deliver on the desired policies. The fact that from time to time there are red, or sometimes orange, flags is entirely consistent with what they are required to do, and is one of the Government’s safeguards.

Lord Skelmersdale
Yes, my Lords, it is of course part of government safeguards, and it should be part of Parliament’s safeguard on occasion to give the Government a green flag, an amber flag or a red flag. In this case, I think that the noble Lord, Lord Kirkwood, and I would agree that it is an amber flag; there is no way in which we can give it a green flag. However, the regulations are clearly beneficial to some 120,000 people. On that basis, I beg leave to withdraw the Motion.

Motion, by leave, withdrawn.